Spending Growth With Vertical Fiscal Imbalance: Decentralized Government Spending In Norway, 1880–1990

Abstract

Vertical fiscal imbalance, decentralized responsibility of spending with centralized financing, creates a common pool problem with spending pressure towards central funds. A model of decentralized government spending under vertical fiscal imbalance is developed, and the importance of national political characteristics for internalization of costs and spending level is investigated in an econometric analysis of Norway during . We argue that in a parliamentary democracy, the internalization of costs is influenced by the party fragmentation of parliament. This is confirmed by the econometric analysis using a Herfindahl index as a measure of fragmentation and political strength.

Reviving Leviathan: Fiscal Federalism and the Growth of Government

“…64. For individual case studies see Borge and Ratts0 2002;and Winer 1980. Fiscal Federalism and the Growth of Government 725 eliminate waste, improve accountability, and help government commit to a policy of nonconfiscatory capital taxation.…”

Myopic or Constrained by Balanced-Budget Rules? The Intertemporal Spending Behavior of Norwegian Local Governments

“…During the period under study the revenues of the local public sector (local governments and counties) amounted to around 20% of GDP, and through the grant system and income tax revenue sharing the revenue growth is largely in the hands of the central government. As documented by Borge and Rattsø (2002a), the regulation of local revenues is part of the general fiscal policy. In recessions, the central government increases grants and the share of taxes received by local governments in order to stimulate aggregate demand.…”

Redistributing income under fiscal vertical imbalance

“…4 The decisions regarding taxing and spending are taken in accordance with the preferences of the median voters 5 : national decisions are taken in function of the national median voter while sub-national decisions are made in function of the sub-national median voters. To isolate the e¤ect that …scal irresponsability has on the redistribution of income, we compare two extreme situations:…”

“…Function 4 Results do not change if we allow national government to have a greater role than just redistributing income. 5 See Black (1948). Assuming a benevolant dictator leads to the comparable results.…”

“…1 Another interesting and complementary argument against a central government setting the budget of sub-national governments is proposed by Weingast et al (1981). Their idea is that, even if the subnational budget is …xed at the national level, it is the result of a logrolling procedure (in the 1 For other empirical evidence sustaining this idea, see Borge and Rattso (2003) and Rodden (2003).…”